Every day in the news, you can read about inflation fears, including supply shortages, price increases, and stock prices tumbling. While big papers talk about the NASDAQ and CPI, as a fractional CFO, I am more interested in understanding what inflation means for small businesses. In this article, we will explore the causes of inflation, its effects on small businesses, and what you, as a business owner, should do to turn financial pressure into growth opportunities.

Small businesses are generally in a weaker position to adjust prices when inflation occurs. Many small businesses are already weakened by the prolonged recession and are hesitant to raise prices.

How can small businesses prepare for the onslaught of inflation that seems almost inevitable?

Now that inflation has begun to heat up, it is time to become aggressive with frequent small price increases. This is generally a better strategy than waiting and trying to catch up with one big price jump at some point. For some businesses, such as restaurants with printed menus, this will create a challenge. But it is worth the effort, as customers are more willing to accept smaller price increases.

Get spending visibility:

To prepare for inflation, small businesses should establish high-resolution spending visibility, which is the foundation of any expense management capability. It enables managers to fully understand where money is spent and who spends it. In an inflationary period, it is critical to establish repeatable, end-to-end, actionable visibility of spending by cost category, business process, function, and business unit.

Unpack the drivers of spending:

The next step is to develop a more robust understanding of the real drivers of cost in an inflationary environment. Dissect the rate (prices paid) and consumption (quantity or volume), including the underlying drivers, for critical cost categories.

Strengthen your pricing power.

Every business affected by inflation will be tasked with passing on the price increase to their customers. Even if you are not eventually impacted by inflation, strengthening your pricing power improves your competitive market position.

Focus on revenue and productivity growth.

Bringing in more business will help, and motivating staff with financial incentives like awards and bonuses can also limit the effects of inflation.

Cut costs, but don’t slash and burn, especially if you have employees. 

Small businesses should cut costs, but not slash and burn, especially if they have employees. For example, don’t stop supplying coffee, sodas, and snacks in the break room. Anything that hurts morale can backfire.

Small businesses should also renegotiate contracts and terms with suppliers. They may be willing to give discounts for preordering, paying early, or buying in bulk. And in the case of cellphone or internet providers, you may have some leverage given the competition they face.

Invest in technology

Businesses in these inflationary times are doubling down on technology spending to get more work done with the same or even fewer people and keep their overhead under control.

They’re investing in robotics for their factories, self-service kiosks for their stores and restaurants, radio-frequency-identification and barcoding systems for inventory control, and artificial intelligence-driven automation so that questions can be answered and workflow accomplished without human interaction.

Revisit your investments

Finally, it’s essential to revisit your investments. Talk to your financial advisor and assess the performance of your money saved in various stock, bond, and other asset accounts.

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